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Bitcoin could be manipulated and that's OK

The price of a Bitcoin is soaring today, extending a rally that started just one day after rumors of the Mt. Gox collapse emerged on February 24th. Based on the Coindesk.com Bitcoin Price Index (BPI), the pretend currency of choice has risen more than 50% in just the last week.

Buyers and sellers don’t have to label their motivations for making a move in Bitcoin. Priced in dollars Bitcoin had dropped 60% since December and was retesting old lows. Buying the Mt. Gox panic made sense for a trade assuming you could trust your exchange.

There’s also another slightly more murky possibility. Bitcoin could be openly manipulated by investors with a lot to gain and very little to lose.

As so helpfully illustrated by Mt. Gox Bitcoin trading is unregulated and relatively anonymous. Coindesk data shows $8.5 billion worth of Bitcoin in circulation currently and despite the huge pop there have been fewer than 86,000 transactions over the last 24 hours. Logically those trades were between a relatively few number of players as the market is dominated by relatively few "investors."  That’s $60 million worth of coins traded in one day. 

If Bitcoin were a stock trading that thin it would take a stunningly small amount of money to manipulate the price. In fact, if Bitcoin traders played it the way stock trading syndicates controlled stocks in the days before the SEC, they could just trade Bitcoin back and forth to one another, walking the price higher and creating the illusion of support.

Why would they do such a thing? Two reasons. First, it wouldn’t be breaking any laws and second VCs, like other Americans, enjoy money. If you already own a bunch of Bitcoin higher is better. 

The big payoff doesn’t come until later. To make Bitcoin legit is going to require widespread adoption, devices, some form of regulation, and a general re-creation of much of what currently exists for traditional currencies. Silicon Valley power player Andressen-Horowitz is spreading millions of dollars in bets on the currency by investing in companies like Coinbase and using its enormous Rolodex to encourage other retailers to get on board with digital currency. If Bitcoin goes mainstream early investments in Bitcoin infrastructure plays will easily be worth more than the $8.5 billion circulating now.

None of this ruins the merits of Bitcoin trading. It just means there are players behind the scenes that know more and have bigger money at stake than most individuals trading Bitcoin can imagine. If Mt. Gox proved anything it’s that individuals are far from in the loop when it comes to the success or failure of Bitcoin exchanges or investments.

Having big Venture money supporting Bitcoin is good in the big picture as long as investors realize that they’re cogs in a much larger scheme.  If the big money pulls out of Bitcoin you can bet they aren’t going to be the ones left holding the bag.